Unsophisticated private investors used to the residential property market are in danger of losing capital as they try their hand at commercial property investment, according to a real estate asset management specialist.
Tim Matthews, Chief Executive of Birmingham-based Blue Marble Asset Management, says that some inexperienced private investors are overpaying for commercial properties, as they are focusing on yield, rather than long term capital value.
Mr Matthews says: “Primarily due to the record low interest rates, where money in the bank is now ‘losings’ rather than ‘savings’, far fewer commercial investment properties are coming the market than this time last year. Those that do are generating a high level of competing demand, driving up prices.
“Many of those competing to purchase are residential investors moving into commercial property for the first time, tempted by the apparently higher yields on offer. Unfortunately some do not appreciate the differences between the two markets.”
Mr Matthews explains: “A residential investment is acquired on the basis that there will always be a demand from tenants due to the housing shortage, and if there is not, then the asset can be sold at the same price at which it was bought. In short, there is no difference in the open market value between a tenanted and untenanted residential property.
“Commercial property investments, on the other hand, can sell for significantly more than the vacant possession value. However, with empty, or soon to be empty, properties investors have to take into account future issues such as a lower rent than expected in a new lease, rent free periods and other incentives, refurbishment costs, empty rates, letting fees and security, plus the time the building is vacant until it is re-let.
“Investors who overpay may not fully understand the mechanics of the commercial property investment market. This is particularly evident when they acquire a tenanted property which has only a short time left to run on the lease.
“We are aware of one quality warehouse building in the North of England with three years left on the lease, which, initially offered at just over £1 million, was acquired for around £1.3 million, by an investor, no doubt, interested solely in the return on their money.
“However, paying this excess has not only reduced the yield, but the new investor has not considered the long term capital value of the building and the potential issue in three years’ time if the property becomes vacant and they want to recoup all their capital back. The market is much less likely to value it at close to the £1.3 million they paid.
“The lack of properties coming to market is making it increasingly difficult for professional commercial property investors and their advisers to find new investments, but if investing intelligently means not acquiring properties at present, as they do not represent good value, then that is the strategy we would rather recommend our clients to pursue.
“Fortunately, our extensive knowledge of the investment market has enabled us to identify a number of off market deals where the price is ‘right’ and we can purchase for our clients in a professional and diligent manner.”
Based in Birmingham’s Colmore Business District, Blue Marble Asset Management is a real estate asset management specialist which presently has more than £60 million of property assets under management. It works for a select range of clients including investment businesses, high net worth individuals, trusts and family offices. Its business is based on taking a holistic view of each of its property investments.